One of the biggest myths about dividend investing is that companies which pay a dividend offer no growth, and thus they pay the distribution in order to keep their long term investors. Many naysayers believe that a company that does not reinvest all of its profits back into the business should be sold. In my experience as a dividend investor, I have seen only one company which has successfully managed to reinvest all of its profits. The reason why this company was so successful in reinvesting those profits was because of the genius of its asset allocator – Warren Buffett. In retrospect Warren Buffett is a closet dividend investor, who invests in companies generating sufficient extra cashflows that allows him to exercise his investing prowess and buy assets at a discount. Even the Oracle of Omaha however is not immune to the laws of diminishing returns or investment mistakes that large capital bases and venturing in unfamiliar industries brings. There isn't any other company like Berkshire Hathaway (BRK.B) which has managed to grow for four or five decades, while reinvesting all of its profits and delivering consistent returns on investment.
Buffett is not the only famous investor who spots attractive opportunities and holds on to them, while receiving dividends. Ben Graham, who was Buffett's teacher and mentor in the field of value investing said that the purpose of a company is to pay dividends to its owners. Without sharing any of the returns that the business supposedly generated, these returns are suspect to ordinary investors, who typically have no say in the way the company operates.
Most exceptional businesses have achieved an optimal balance between reinvesting profits back in the business and distributing them to shareholders. Coincidentally, some of the best dividend stocks, which boast long records of consistent dividend increases also happen to generate high returns on equity.